The Role of the SEC

My class assignment today is to opine over the following:

The goal of the registration requirements of the Securities Act of 1933 is to give investors the information they need to make intelligent investment decisions. The Securities and Exchange Commission (SEC) reviews the registration materials to be sure the information is complete and not misleading. However, as the law is currently written, the SEC’s mission does not include evaluating the economic merit of the registered securities. Should it?

Should the role of the SEC include reviewing the merits of a registered offering of securities? Suppose while reviewing a registration the SEC concludes that investors are likely to lose money, should the SEC block the offering? Support your conclusions with clear arguments.



I would argue against the SEC expanding its role to review the merits of a registered offering of securities for the following reasons:

The goal of the 1933 Act was to increase public trust in the capital markets by requiring uniform disclosure of information about public securities offerings.  The SEC’s role was stated to “make information available to investors”, operating under the assumption that markets operate more efficiently when information is disclosed, and therefore investors would view investing in securities as a less risky activity.  Their subsequent investment would then result in economic stimulus.  This has worked well in the U.S., a system where most corporations are not closely held, and thus these financial disclosures are often the most important piece of information that investors use in deciding whether or not to invest in a company.

In this capacity, the SEC acts as an independent regulatory body.  Its duty is to regulate the securities industry (to require financial disclosure) and prosecute those that do not comply.

To expand the SEC’s role to that of an investment “watchdog” would result in drastic changes to the U.S. financial system.  Allowing the SEC to opine over the merits of a security would not add any additional information (as we assume this opinion is based upon the financial statements provided), and would act to inject persuasion and opinion over the free market, thus skewing the current structure of free market decision making.  In essence, this would appoint the SEC over the stock markets, and give the SEC a high amount of control and leverage over the markets.  This is undesirable because even though the SEC is an independent body, it is still a federal government agency that is not immune to political persuasion.  The SEC Commissioners are, in fact, Presidential appointees.  Therefore, the SEC could technically discriminate against certain companies or individuals by giving them a poor “rating” or issuing a warning about that company’s stock.  This degree of government control in the stock market is not desirable, as it would lessen the original decree of the SEC, which is to increase fairness and trust in the markets.


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